Seattle/New York: Warren Buffett has a message for investors wondering when he’ll strike his next big deal: Be patient.

After a year in which he was largely frustrated on the acquisition front and saw cash pile up at his conglomerate, Berkshire Hathaway Inc., he used his annual letter to shareholders to remark on the “all-time high" cost of buying businesses and how the “ample availability" of cheap debt has fuelled unwise deals. Berkshire, Buffett wrote, will still occasionally get opportunities to make large purchases at sensible prices.

“In the meantime, we will stick with our simple guideline," he said. “The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own."

It was a note of caution that may reverberate as investors weigh whether the bull market will resume after this month’s sell-off. While Buffett, 87, reiterated his view that equity investors in America will do well over the long haul, he also advised against buying stocks with borrowed money and highlighted how even his own company has seen its shares swoon on a few occasions over the past five decades.

The letter included “more than a subtle warning that prices, on many fronts, are high," said David Rolfe, the chief investment officer at Wedgewood Partners, a money manager that oversees $4.5 billion, including Berkshire shares. “Take heed."

Higher prices

While mergers and acquisitions slowed globally last year, deal prices have been climbing and there are signs 2018 is getting off to a faster start. Acquirers paid a median of about 12 times earnings before interest, taxes, depreciation and amortization in 2017, up from a multiple of 8.9 in 2013, according to data compiled by Bloomberg.

Few CEOs have as extensive a track record of buying businesses as Buffett. Since he took control of Berkshire in 1965, his patient stream of acquisitions has transformed the company from a struggling textile maker into a conglomerate now valued at about a half trillion dollars. Its subsidiaries include electric utilities, BNSF Railway, auto insurer Geico, Dairy Queen, Duracell and dozens of other enterprises.

Operating earnings from those businesses slumped 18% last year to $14.5 billion after the company’s insurance operations posted their first underwriting loss since 2002. But book value per share, a gauge of Berkshire’s net worth, climbed 23% last year, in big part because of changes to US tax law. Buffett has said the metric is a “crude, but useful" measure of how much the conglomerate is worth.

Still, it was the cash pile that drew attention. Last year, it climbed 34% to a record $116 billion. Deploying those funds into new, large acquisitions is key to Buffett’s strategy to increase the earnings of his company over time. For now, most of Berkshire’s liquidity is in short-term US Treasury bills, earning “only a pittance," the billionaire wrote.

Some longtime Berkshire investors said that, while the cash figure is staggering, they weren’t concerned about Buffett’s ability to find another huge acquisition.

“Everybody’s always impatient" about deals, said Steve Wallman, a money manager in Wisconsin who owns Berkshire shares. Buffett’s pattern is to make “punches"—investments where he commits a large amount of capital that have the potential to take his company to the next level, Wallman said. “He’s getting ready for another punch."

Tom Russo, who oversees about $14 billion at Gardner Russo & Gardner, including Berkshire shares, said he has no question that Buffett’s “going to be able to put a tremendous amount of cash to work—possibly soon."

Other parts of the letter, which was notably shorter than in years past, covered well-worn territory for the billionaire. Buffett again called out the wasteful fees that many money managers charge and highlighted the risk of owning supposedly safe bonds.

Things left out

There were also striking omissions. Despite his normal fist-pumping about the US economy, Buffett made only a brief reference to how the country remains “fertile" ground for business. He didn’t mention Berkshire’s new venture with Amazon.com Inc. and JPMorgan Chase & Co. to start a health-care company. And the billionaire investor barely elaborated on the new US tax code or the stocks in his portfolio, including his recent build-up of Apple Inc. shares.

Also absent: a deeper explanation of why Berkshire promoted two longtime executives—Ajit Jain and Greg Abel—to vice chairmen last month, or how their new roles affect the succession plan at the conglomerate.

“Bottom line," said Jim Shanahan, an analyst at Edward Jones who covers Berkshire, “you’ve got a letter that was short." Bloomberg